Context
Island country is facing worst economic crisis. The simmering tension of common people hit the road and clashed with police. A vicious violence erupted in the capital and around.
Present situation
- A severe shortage of foreign currency
- Shortage of essential goods, including fuel, food etc.
- Steep devaluation of currency
- Inflation is very high
How did Sri Lanka get here?
- Critics say the roots of the crisis, the worst in several decades, lie in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit. Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.
- But the current crisis was accelerated by deep tax cuts promised by Rajapaksa during a 2019 election campaign that were enacted months before the COVID-19 pandemic, which wiped out parts of Sri Lanka’s economy.
- With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic.
- The Rajapaksa government’s decision to ban all chemical fertilisers in 2021 to switch to organic farming, a move that was later reversed, also hit the country’s farm sector and triggered a drop in the critical rice crop.
- High debt burden: Asian Development Bank, Japan and China are the major lenders. Foreign exchange plummeted. IMF said that public debt had risen to “unsustainable levels” and foreign exchange reserves were insufficient for near-term debt payments.
Measures taken by government
- Talks with the International Monetary Fund (IMF) for a loan programme. IMF called for step to be taken to restructure the debt.
- India has given additional credit lines through currency swap agreement.
